How to Choose a Credit Consolidation Loan For Paying Off Credit Card Debt

A credit Consolidation loan is usually taken out to pay off debts with a higher rate of interest such as balance on a revolving line of credit such as a credit card.  While it is true that taking out a credit Consolidation loans can ease the burden of your monthly payments it is important to shop around in order to find the best interest rates, amount and terms of repayment.

The primary factor that is considered was taking any kind of a loan is the interest-rate.  The interest rate determines the amount of extra money that you will be required to pay against the principal amount that you borrow.  The lower the rate of interest the more you stand to benefit from taking out a credit Consolidation loan. A credit Consolidation loan typically involves using an asset such as property automobile as a collateral as security.  Once again your credit history will also come into focus and play a role into determining the interest-rate that a lender is willing to offer you.  If you are looking for a credit Consolidation loan in order to recover from a serious debt problem than the odds are that your credit history has already been marred by a negative items such as late or nonpayments on credit accounts.  If this is the case then using a collateral may be your only option for getting a loan on a lower rate of interest.

It should also be noted that the credit Consolidation loan is most often used to pay off unsecured debt like credit card and personal loans.  You may find yourself hard pressed to convince a lender to extend a credit Consolidation loans to pay off Secured debt such as mortgage and automobile loan that is tied to an asset.

There is a fine line between credit Consolidation and debt management.  The biggest difference is that under the credit Consolidation loan you are given a completely new loan that will pay off all the debts that have been consolidated under the debt consolidation plan immediately.  After that you are left with the single credit Consolidation loan to pay off.  Under a debt management plan a credit counseling service will renegotiate the terms of payment and interest with your current creditors allowing you to make at lower single payment to them every month which they used to reimburse the lenders.  Under debt management plan you are not extended a completely new loan and continue to pay your existing lenders with the expectation of getting out of debt in the next two to five years.

There are two ways in which a credit Consolidation loan lowers your monthly payment.  One is by offering you a loan at a lower rate of interest which we have already mentioned.  The second is by giving you a credit Consolidation loan with a longer tenure.  Extending the repayment period automatically lowers the monthly payments.  Although you pay be paying a larger sum of money in the long run the advantage of having to make lower payments in the short term may help you stay afloat and get your finances back on track.  Once you are in a better shape financially you can always take a more aggressive approach to paying off the credit Consolidation loan.

You need to be very careful while choosing a debt consolidation service.  Perhaps one of the best way in order to get a credit Consolidation loan is to deal with your own bank or any other legitimate financial institution that has an accredited and well-known debt consolidation service.  Learn to be extra suspicious of offers that seem too good to be true with credentials that are doubtful.

You also need to consider your options.  As mentioned before there is a fine line between debt consolidation plan and debt management plan.  You may manage to pay off all your lenders without taking out a new loan by having a legitimate credit counselling service renegotiating repayment terms under a debt management plan, or by negotiating with your lenders yourself, although the lenders are usually more susceptible to renegotiating with consumers who have enrolled themselves in a debt management plan with an accredited credit counselling service.

The idea behind taking out a credit Consolidation loan is to lower your monthly burden so you can get your financial affairs back on track.  For people suffering from serious debt problem it may be the only option to stay afloat and avoid other dire methods such as filing for bankruptcy.  Make sure that your credit Consolidation plan does indeed help lessen your monthly burden allowing you to get back on your feet.

What is A Debt Management Plan

Under a debt management plan a credit counseling agency undertakes to renegotiate the terms of payment with your creditors. It then sets up a repayment schedule by your agreement. You deposit funds with the credit counseling firm every month and they make the payments on your behalf.

The main intent of a debt management plan is to negotiate a lower rate of interest on your loans. a complete waive of interest is usually not possible and does not happen in most of the cases.

The counseling agency also may help you with reestablishing your credit once you have successfully completed your debt management plan. A debt management plan aims to get you out of debt in 2-5 years. If the credit counseling agency calculates that it is not going to be possible for you to pay off your debts in this duration it may recommend other options like filing for bankruptcy.

A debt management plan serves the purpose of both the creditors and the consumer. It helps the consumer repay the debt and the lenders in getting the money that is owed to them.

Further credit may not be available to you during the time that you are under a debt management plan.

Since being in a debt management plan reflects that you are facing a debt problem, it may affect your credit worthiness adversely, resulting in lowering your credit rating.

Most of the creditors report the fact to the credit bureau that a consumer is making payments under a debt management plan, this information will reflect on your credit report. different creditors have different policies regarding reporting consumers in a debt management plan. Some may view it as a positive sign that you are trying to get your debt under control, while others may not work with you in the future owing to the fact that you not making the payments on the terms agreed to previously. If you receive calls or notifications from collectors you can ask them to contact the credit counseling agency instead.

A debt management plan will strive to make you debt free in 3 to 5 years. A debt management plan can be helpful if you find that your current income does not allow you to pay off your debt according to the current terms of repayment. Taking the help of a credit counseling service to renegotiate the terms through a debt management plan could prove to be more effective than trying to renegotiate with your creditors yourself.

Many credit counseling services have existing business relationships with creditors. This makes it easier for them to communicate and work out an agreement with them on your behalf. The creditors also feel more comfortable lowering the interest rate and providing concessions when you’re dealing through professional service.

Several major lending institutions and banks do not consider being part of a debt management plan as something negative. In fact some major lenders now consider a consumer who is part of a debt management plan to be taking positive steps to reduce his debts and pay off the money that he has borrowed.

 

However, the final goal of a debt management plan is to help you with our debt situation and get back up on your feet so that you can start anew with more responsible credit habits.

If you have been late in making the payments before entering in to a debt management plan, this information will continue to show on your credit report in spite of being in the repayment plan.

In most cases your creditors will close down your lines of credit such as a credit card and you will not be able to use it further. Rare exception are made in case your employer needs you to travel and you need to use your credit card for that purpose.

Also, it is not possible most of the time to include certain credit accounts in the debt management plan and leave others out of it. this depends on the credit counseling agency you are working with and your credit counselor will be able to advice as to whether it will be better to include all of your credit accounts in the repayment plan or not.